For over seven decades, the U.S. dollar has been the foundation of the global financial system. It is the currency of trade, the benchmark of reserves, and the anchor of trust in an often unstable world. But in recent years, quiet shifts have begun to stir louder questions: is the global dominance of the dollar beginning to erode? And if so, what comes next, not only for major economies, but for emerging markets like Pakistan, whose financial health is deeply tied to the dollar-led global order?

The concept of de-dollarization, the process of reducing reliance on the U.S. dollar in global trade and finance, is not new. But what was once largely theoretical is now taking material form. Russia and China have made notable moves to settle trade in their national currencies. The BRICS bloc has revived discussions of creating alternative payment systems. Even in the Gulf, some energy exporters are showing a growing interest in accepting payments in currencies other than the dollar.

The dollar still accounts for about 58% of global foreign exchange reserves and more than 80% of global trade invoicing (IMF, 2023)

This shift is not sudden, nor is it yet sweeping. The dollar still accounts for about 58% of global foreign exchange reserves and more than 80% of global trade invoicing (IMF, 2023). But it is no longer unchallenged. Several trends are pushing countries to reconsider their overdependence on the greenback: geopolitical tensions, financial sanctions, and concerns over monetary policy spillovers. In a more multipolar world, relying on a single national currency to underpin global trade seems increasingly risky.

As the U.S. has expanded the use of financial sanctions as a foreign policy tool, particularly in cases involving Iran, Russia, and Venezuela, many countries have begun to fear the political costs of dollar dependence

Sanctions have been a key driver. As the U.S. has expanded the use of financial sanctions as a foreign policy tool, particularly in cases involving Iran, Russia, and Venezuela, many countries have begun to fear the political costs of dollar dependence. Being cut off from the U.S. financial system, including SWIFT transactions and dollar clearing, can cripple an economy overnight. In response, some states are actively developing alternatives, from local currency swaps to regional payment systems.

Central bank digital currencies (CBDCs), particularly China’s digital yuan, are being positioned as instruments of both financial innovation and strategic autonomy

The rise of digital currencies is another factor. Central bank digital currencies (CBDCs), particularly China’s digital yuan, are being positioned as instruments of both financial innovation and strategic autonomy. Although still in early stages, the deployment of these digital tools may over time reduce the friction of using national currencies in cross-border trade. If successful, they could gradually chip away at the dollar’s settlement dominance.

Nevertheless, de-dollarization does not come without obstacles. Not only does the US economy have strength, but so do deep capital markets, legal stability and institutional trust. These are hard to replicate. Countries as large as China simply cannot compete in depth or in convertibility. Therefore, most countries continue to maintain most reserves in dollars, not because they prefer it, but because alternatives still are not more viable.

Islamabad also endeavored to use yuan in bilateral trade with China and it has signed local currency swap agreements

The implications of this evolving trend are of a mixed color for countries such as Pakistan. These repeated external vulnerabilities due to their dollar dependency, on the other hand, crossed Pakistan’s risk threshold. It has been hit also by volatile exchange rates, high debt servicing in foreign currency, and susceptibility to U.S. monetary tightening. Recently Islamabad also endeavored to use yuan in bilateral trade with China and it has signed local currency swap agreements. These are pretty prudent steps to what building resilience would be, but are not representative of broader reform.

Instead of getting rid of the dollar, the aim should be to improve the way we manage it and at the same time strengthen the domestic financial ecosystem

At the same time, any sudden shift away from the dollar, which would affect rapidly increasing imports and vast sums in remuneration, is impractical and risky, in Pakistan’s case due to its economic structure and high external debt burden, limited reserves, and still low export diversification. Dividing settlement currencies is wise, but replacing the dollar entirely is not a real choice in the short term. Instead of getting rid of the dollar, the aim should be to improve the way we manage it and at the same time strengthen the domestic financial ecosystem.

This is more broadly the start of the end of the beginning of the movement of a more plural financial world to replace the dollar era. Multiple currencies may coexist in trade settlements and reserves, with regional hubs emerging based on political alignments and economic flows. This will make the global economy more complex, but also potentially more balanced. However, it will require stronger cooperation, clearer rules, and greater transparency.

In a world where financial power is becoming more dispersed, adaptability may be the most valuable currency of all

The end of the dollar era is not around the corner, but the era of dollar unquestioned dominance may be. For many countries, including Pakistan, this is a moment of strategic recalibration. Rather than waiting for shocks, the task ahead is to anticipate shifts, reduce vulnerabilities, and build systems that are more autonomous, more diverse, and more resilient. In a world where financial power is becoming more dispersed, adaptability may be the most valuable currency of all.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.